In 2021, Americans donated $135.78 billion to religious organizations and churches, according to data from GivingUSA.org. None of that money was taxed at the local, state, or federal level. Have you ever wondered, “Why are churches tax-exempt in the United States?” If so, you’re not alone. It’s a topic that’s frequently brought up for debate. Before we answer your question, however, it’s important to understand how churches are defined by the IRS and the reasoning behind their tax-exempt status.
A Brief History
The Roman Emperor Constantine (306-337) was the first to grant churches tax-exempt status in 312, following his conversion to Christianity. America’s tax exemption for charities, however, can be traced to the English Statute of Charitable Uses of 1601. Since our country’s founding, churches have been tax-exempt from federal taxes, but it wasn’t until 1894 (Tariff Act) that it became official. Although the Tariff Act was later declared unconstitutional, the church tax exemption was reinstated by the Revenue Act of 1913. Today, all 50 states and the District of Columbia exempt churches from paying income and property taxes.
Why Are Churches Tax Exempt?
The IRS doesn’t tax churches because they consider them the same as other charities. This is because churches support their communities in numerous ways. Many provide social services, such as shelters and food pantries. They often provide assistance for low-income families, including free afterschool programs. Additionally, exempting churches from taxation is seen as a clear separation of church and state.
In exchange for their tax-exempt status, churches are supposed to refrain from engaging in political activities per the Johnson Amendment (1954). Unfortunately, not all do. And, even when they are caught breaking the rules, few are ever punished by having their tax-exempt status revoked.
In 2017, an executive order signed by President Trump instructed the IRS not to take adverse action against churches or religious organizations for political speech. This order on religious freedom was supposed to be the first step in repealing the Johnson Amendment but to this day the law remains intact.
Requirements for Tax-Exempt Status
Churches, unlike other charities and religious organizations, are automatically considered tax-exempt if they meet the requirements of IRC Section 501(c)(3), which includes the following:
- Must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes;
- Net earnings are not for the benefit of any private individual or shareholder;
- No substantial part of its activity may attempt to influence legislation;
- The organization may not intervene in political campaigns; and
- The organization’s purposes and activities may not be illegal or violate fundamental public policy.
Additionally, churches aren’t required to file IRS Form 990 or 990-EZ. Other religious organizations, however, must apply to the IRS for tax-exempt status (unless their gross receipts are less than $5,000 annually) and file Form 990.
What’s Considered a Church?
For tax purposes, a church is a place of worship. This typically includes temples, synagogues, mosques, and Christian churches. The IRS also recognizes some conventions and associations, as well as other organizations that may meet some or all of the following requirements:
- A distinct legal existence
- A recognized creed or form of worship
- A definite and distinct ecclesiastical government
- A formal code of doctrine and discipline
- A distinct religious history
- A membership not associated with any other church or denomination
- An organization of ordained ministers
- Ordained ministers selected after completing prescribed studies
- A literature of its own
- Established places of worship
- Regular congregations
- Regular religious services
- Sunday schools for the religious instruction of the young
- Schools for the preparation of worship
- Schools for the preparation of its ministers
- Any other facts and circumstances that may bear upon the organization’s claim for church status
To qualify as a church, there is no set number of criteria that an organization must meet. It is purposely vague, allowing leeway in determining which organizations qualify. In fact, it’s so easy to start a church in the United States that John Oliver (Last Week Tonight) created Our Lady of Perpetual Exemption in 2015 just to prove a point.
Income That is Tax Exempt
Many churches rely on donations, gifts, and grants to operate. All of this income is tax-exempt. Additionally, many bring in money from other activities. If the income earned is unrelated to the church’s religious mission, they may have to pay unrelated business income tax (UBIT). Certain activities are often excluded, however, including income earned from:
- Bingo games
- Thrift shop sales
- Volunteer work
- Donor lists
- Giveaways
Churches earning more than $1,000 from any activity unrelated to their religious mission must file IRS Form 990-T, Exempt Organization Business Income Tax Return.
Should Churches Remain Tax-Exempt?
The debate about whether churches should be tax-exempt or not has gone on for decades. And it’s likely to intensify as more Americans reject organized religion. Of course, there are pros and cons to both sides of the argument. On one hand, taking away their tax-exempt status would allow churches to freely engage in politics without any fear of reprisal. The additional revenue from property taxes may even help reduce property tax rates in their communities. Conversely, keeping the status quo means churches can continue to provide social services that would likely be reduced if money had to be diverted to taxes. These services would then fall to the local governments or other non-profits, likely putting a strain on their budgets.
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